Fibonacci retracement is a chart tool that divides a selected price move into percentage levels. Traders use those levels as possible areas of support or resistance during a pullback, rather than as guaranteed turning points.
Choosing the measured move
The tool is anchored to a chosen swing low and swing high. Common levels include 23.6%, 38.2%, 61.8% and 78.6%. Many displays also include 50%, although that midpoint is not a Fibonacci ratio.
For a rise from $100 to $200, a 38.2% retracement of the $100 move is $38.20 below the high, or $161.80, using a linear price calculation. It does not mean a 38.2% decline from the $200 price. After a downward move, retracement describes a rebound into the preceding decline.
A map with chosen anchors
Different swing points or timeframes produce different levels. Moving the anchors after seeing the result can make a chart appear more predictive than the original analysis was.
Price may pause, reverse or pass straight through any level. Fibonacci relationships in mathematics do not require markets to respect those levels. Retracements describe locations within the selected move; extensions project levels beyond that range.